You can put the acquisition in your cart, but can you check out?

What if you had to get re-qualified for your credit limit every time you went to use your card?

That’s what most corporate borrowers have to do today. Let me explain.

When you qualify for a credit card, there’s a pretty standard process:

1. You have to prove you have the financial means to support that credit limit
2. Once you get approved, you can use that card as much as you want, and
3. You have to make payments on the outstanding balance to continue utilizing the credit. In other words, if the credit card company believes you’re qualified when you sign up, they trust you’re still qualified when you use the card later to pay for your dinner.

“𝗟𝗶𝗺𝗶𝘁𝗲𝗱 𝗖𝗼𝗻𝗱𝗶𝘁𝗶𝗼𝗻 𝗧𝗿𝗮𝗻𝘀𝗮𝗰𝘁𝗶𝗼𝗻” (or “𝗟𝗖𝗧”) terms in credit transactions work in the same way. If a borrower meets the incurrence conditions for debt when it signs up a transaction—say an acquisition via a stock purchase agreement—it will be deemed to meet the conditions and permitted to incur the debt when the transaction closes months later—even if a drop in EBITDA means the company no longer complies with those same conditions when the deal crosses the finish line.

While inclusion of LCT terms in credit deals is increasing, such terms still aren’t in a majority of deals—but, should they be? From the point of view of issuers, this term is critical to making sure you can close a deal you’ve signed—or use the credit card you’ve qualified for.

In Q3 ‘24, 25% of publicly-filed high yield credit agreements included LCT terms, with 23% of deals including such terms in Q3 ’23. Some recent ones that got it 👏 : 8x8 (represented by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates), Phibro Animal Health (represented by Kirkland & Ellis), and PAR Technology (represented by Gibson Dunn)

Message me if you’d like access to the excel with deal data on LCT terms.

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